Housing for an Inclusive New York:
Affordable Housing Strategies for a High-Cost City
Fourth in a series of five policy briefs by the NYU Furman Center
POLICY BRIEF | NOVEMBER 2015
4
The Latest Legislative
Reform of the 421-a
Tax Exemption: A Look
at Possible Outcomes
Since the early 1970s, New York City has provided a state-authorized, partial property tax exemption for the construction of new residential buildings. In the 1980s, the New York City Council
amended the program to require that participating residential buildings in certain portions of
Manhattan also provide affordable housing. Most recently, New York State extended the existing
program through the end of 2015 and created a new 421-a framework for 2016 onward. However,
for the program to continue beyond December, the legislation requires that representatives of
W W W. F U R M A N C E N T E R .O R G | @ F UR MA NCE NTE R NY U
residential real estate developers and construction labor unions reach a memorandum of understanding regarding wages of construction workers building 421-a program developments that
contain more than 15 units.
This brief explores the possible impacts of the new 421-a legislation on residential development
across a range of different neighborhoods in New York City, including neighborhoods where rents
and sale prices are far lower than in the Manhattan Core and where the tax exemption or other
subsidy may be necessary to spur new residential construction under current market conditions. 1
We assess what could happen to new market rate and affordable housing production if the 421-a
program were allowed to expire or if it were to continue past 2015 in the form contemplated by
recently passed legislation. Our analysis shows that changes to the 421-a program could significantly affect the development of both market rate and affordable housing in the city.
1 The Manhattan Core stretches from the southern tip of Manhattan to 110th Street on the west side and 96th Street on the east side.
I.
What is the
421-A Program?
Figure 1: 421-a Geographic Exclusion Area, 2015
The 421-a property tax exemption substantially
reduces the property taxes that a newly built residential development incurs. During the “fullexemption” period, the property owner pays a
partial tax based only on the property’s assessed
value prior to any development for a period; then,
the full tax (based on the property’s post-development assessed value) is phased in over an addi-
T H E L AT E S T L E G I S L AT I V E R E F O R M O F T H E 4 2 1-A TA X E X E M P T I O N : A L O O K AT P O S S I B L E O U TC O M E S
tional period of time.2
2
Over time as the housing market has strengthened,
the New York City Council added requirements
for affordable housing in portions of the city. In
Sources: New York City Department of Housing Preservation and
Development, NYU Furman Center
the 1980s, the law was amended so that develop-
areas not included in the GEA have continued to
ers constructing projects in portions of Manhat-
be eligible without a set-aside requirement, but
tan (designated as the Geographic Exclusion Area
all units in a building receiving the benefit (both
or “GEA”) could only qualify for the 421-a program
affordable and market-rate) have been subject to
exemption if they either set aside 20 percent of the
rent stabilization.
units as affordable for low-income households or
purchased negotiable certificates that support the
development of affordable units in buildings elsewhere in the city.3 The current rent standard for the
affordable units is based on 60 percent of the area
median income (AMI), which is $46,620 for a threeperson household in 2015.4 With subsequent amend-
II.
The New
Legislation
The new legislation passed in June 2015 extends
ments, the State and local legislature expanded the
the current program to December 2015.5 Following
GEA to include neighborhoods beyond Manhattan
that, the legislation calls for the program to either
as shown in Figure 1. Residential developments in
expire if no labor agreement is reached or to continue under a new framework that eliminates the
2 Assessed Value (AV) for residential properties of four or more units
is equal to 45 percent of the Market Value (MV), as determined by the
Department of Finance. The MV is determined for all Class 2 properties as though they were income-producing properties (e.g., rentals)
even if in reality the properties are condominiums or cooperatives.
3 Since 2007, it has only been possible to locate the affordable units
off-site through the purchase of negotiable certificates that are left
over from written agreements entered into prior to December 28,
2007. See Appendix I for discussion of negotiable certificates.
4 If there is substantial government assistance, at least 20 percent
of the building must be affordable for households with income at or
below 120 percent of AMI with an average affordability for households at 90 percent of AMI. N.Y. REAL PROP. TAX LAW § 421-a (2)(c)
(ii) (McKinney 2015). See the Appendix I for more details about 421-a.
GEA. Under the new framework, all rental development receiving the benefit would need to provide affordable housing on-site. To participate
in the program, rental developers would need to
select one of the options for providing affordable
housing summarized in Table 1. As the table shows,
5 Negotiable certificates can be used through the duration of the current program (i.e., through December 2015). N.Y. REAL PROP. TAX
LAW § 421-a (3)(a) (McKinney 2015).
Table 1: Program Characteristics of Current 421-a Program and Pending 421-a Program for Years 2016-2019
Current 421-a
program
with affordable
housing
Current 421-a
program
without affordable housing
Option A
Option B
Option C
Option D
Ownership
Structure
Rental or
Homeownership
Rental or
Homeownership
Rental
Rental
Rental
Homeownership
Geographic
Availability
Citywide
Outside of
Geographic
Exclusion Area
No restriction
No restriction
Unavailable in
Manhattan south
of 96 Street
Unavailable in
Manhattan or
for projects with
more than 35
units
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Average initial
assessed value
per unit cannot
exceed $65,000
3
Affordability
Requirement
(for a minimum
of 35 years)
20% of units are
at 60% of AMI
(or up to 120%
of AMI if there is
substantial government assistance)
No requirement
Allowed
Additional
Subsidy
No restrictions
No restrictions
Tax-Exempt
Bonds and Four
Percent Low
Income Housing
Tax Credits
No restrictions
(designed for
use with HPD
or other government discretion
on direct
subsidy)
Tax Exemption
Manhattan
south of 110th
Street: 12 full
years + eightyear phase-out
with affordable
housing on-site
or two full years
+ eight-year
phase out (subject to AV cap)
with certificates
11 full years +
4-year phaseout
25 full years
25 full years
Elsewhere: 21
full years + fouryear phase-out
with affordable
housing on-site
or 11 full years +
four-year phase
out (subject to
AV cap), with
certificates. For
projects outside
the GEA, this
option is only
available with
substantial government assistance.
25% total:
30% total:
30% total:
10% of units at
40% of AMI
10% of units at
70% of AMI
30% of units at
130% of AMI
10% of units at
60% of AMI
20% of units at
130% of AMI
No AMI
restrictions
5% of units at
130% of AMI
25% for years
26-35
30% for years
26-35
None allowed
Not applicable
25 full years
14 full years on
assessed value
of no more than
$65,000
30% for years
26-35
25% for years
15-20 on
assessed value
of no more than
$65,000
the revised law increases the percentage of affordable units required and extends the length of the
tax exemption. The full tax-exemption benefit for
units in the building.6 The new program will also
Monthly
Affordable
Rental Payment
Annual (30% of Monthly
Percentage of AMI
Income
Income)*
provide more options for the depth of affordabil-
40%
$31,080$777*
ity. Condominiums would no longer be eligible for
60%
$46,620$1,166
the benefit except for smaller projects outside of
70%
$54,390$1,360
Manhattan (see Option D in Table 1).
130%
$101,010$2,525
rentals would last 25 years everywhere followed by
a 10-year phase out during which time the benefit
would be based on the percentage of affordable
7
While the 421-a program currently requires that
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all market-rate units enter rent stabilization for
4
2015 HUD New York Metro Area Income Limits
and the Maximum Affordable Rents for a
Three-Person Household
Sources: U.S. Department of Housing and Urban Development
Income Limits, NYU Furman Center
*These payments include electricity and gas.
the benefit period, the new 421-a program will
not subject the market-rate units to rent stabilization if the rent exceeds the then current threshold
lower AMI levels. Option C requires that 30 per-
for deregulation, which New York State recently
cent of units be rented to households with income
increased to $2,700 per month.8 Under both the
at no more than 130 percent of AMI, but unlike
existing and new program, affordable units are
under Option B, developers are prohibited from
subject to rent stabilization for 35 years (and for
using other grant, loan or subsidy programs and
as long thereafter as a tenant at year 35 remains
therefore likely would not provide units at lower
in the apartment).
AMI levels.9
Option A requires that 25 percent of the units be
The new program also offers a limited option out-
affordable with 10 percent at 40 percent of AMI,
side of Manhattan for homeownership projects
10 percent at 60 percent of AMI and five percent at
with no more than 35 units and with an initial,
130 percent of AMI (See sidebar for income limits
post-construction average assessed value (AV)
for a three-person household). Option B requires
per unit of $65,000 or below. For these buildings,
that 30 percent of the units be affordable with 10
Option D would impose no affordability require-
percent at no more than 70 percent of AMI and
ment and a shorter tax exemption (capped at an
20 percent at no more than 130 percent of AMI.
AV of $65,000/unit) would apply—a 14-year full
While these AMI levels are too high for use of Low
exemption followed by a six-year period with a 25
Income Housing Tax Credits (LIHTC) and tax-
percent exemption from property taxes.
exempt bonds, Option B is designed for use in conjunction with other subsidy programs whereby a
developer would likely provide affordable units at
6 For example, if 25 percent of the units are affordable, then 25 percent of the incremental value above the pre-construction value will
be exempted for years 26 through 35. If 30 percent of units are affordable, then 30 percent of the incremental value will be tax exempt for
years 26 through 35.
7 The new 421-a program also offers an extended tax exemption for
certain existing properties.
8 N.Y. REAL PROP. TAX LAW § 421-a (16)(f)(xi) (McKinney 2015).
9 Households at slightly lower AMI levels (i.e. down to 120% of AMI)
may be served depending on the marketing band chosen by the
developer.
Table 2: Participation in the 421-a program among recently completed* market-rate buildings
with 10 or more residential units located inside the GEA, 2011-2014
Manhattan below 110th Street
Other parts of the GEA
Number of Number of
Share of Number of Number of
Share of
buildings
unitsunits
buildings
unitsunits
Condominium buildings
421-a (on-site)
00
0%4
113
34%
421-a (certificates)
6
248
55%
6
139
42%
No tax exemption
7
200
45%
2
78
24%
Rental buildings
421-a (on-site)
12
3,696
95%
26
2,124
81%
421-a (certificates)
3
104
3%
6
314
12%
No tax exemption
5
90
2% 4
199
8%
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*This includes buildings that received an initial certificate of occupancy in 2011-2014 and new construction building permits after the current rules of the 421-a program took effect in July 2008. It excludes buildings receiving other types of residential property tax exemptions.
5
III.
Recent Utilization
Patterns
of the condominium projects in Manhattan below
110th Street did not participate in the 421-a program
at all and instead pay full property taxes. The other
half did participate by using negotiable certificates.
But for the existence of remaining negotiable certifi-
Table 2, which summarizes the 421-a program use
cates, all of those condominium projects would have
within the GEA between 2011 and 2014, provides
been built without the 421-a exemption according
some insight into how the proposed changes to
to interviews with real estate industry participants.12
the 421-a exemption are likely to affect future construction activity.10
Inside the GEA, despite the requirement that
developers create affordable units, Table 2 shows
that 98 percent of rental units in the Manhattan
Core and 93 percent of rental units in other parts
of the GEA benefited from the program, suggesting that the tax exemption may more than compensate for the cost of creating affordable units.11
The economic calculus for condominium developers inside the GEA appears to be quite different
from that of rental developers, as many choose to
forego the tax exemption altogether. Around half
10 See Appendix II for methodology used to compile Table 2.
11 During the study period, it was still possible for some developers
to obtain a 421-a exemption through purchase of negotiable certificates that were left over from 2007 or earlier. 421-a projects creating
affordable units on site may have also benefited from four percent
LIHTC, tax-exempt bond financing and inclusionary housing floor
area bonus.
12 As we can see in Table 2, it is possible for condominium developers
to undertake development projects without using the 421-a program.
There are several possible reasons for this. First, condominium
developers may be less willing in general to provide affordable units
on-site, perhaps because of the perceived difficulty of marketing highpriced units in buildings that have low-income tenants and because
of the complexity of structuring a condominium with association
fees or assessments for major capital improvements, or due to the
requirement that affordable rental units be of comparable type to
market-rate units. Second, condominium developers may not believe
they can capture enough of the value of the property tax exemption
through higher sales prices to make up for the cost of setting aside
affordable units. Third, even if the condominium market efficiently
prices units to reflect an exemption, the value may simply be worth
less than it would be for a rental building, especially in Core Manhattan; under state law, the market valuation process the city must use
to determine the tax burden on individual condominium units tends
to undervalue units at the highest end of the market. This means the
effective tax rate (measured as a percent of market value) on some
condominium units is significantly lower than for other multifamily
buildings, diminishing the relative value of the exemption. Additionally, condominium buyers may qualify for New York City’s Co-op and
Condominium Property Tax Abatement program if they purchase a
unit that does not participate in 421-a and occupy it as their primary
residence. Madar, J. (2015, March 26). Inclusionary Housing Policy
in New York City: Assessing New Opportunities, Constraints, and
Trade-offs. Retrieved from http://furmancenter.org/files/NYUFurmanCenter_InclusionaryZoningNYC_March2015.pdf. Lastly, negotiable
certificates, while allowing for the units to be built offsite, offer a
much reduced tax exemption period and so at best have limited value
to condominium purchasers.
In the other parts of the GEA, most condominium
program provided affordable units on site. The rest
development projects participated in the 421-a pro-
purchased negotiable certificates, which allowed
gram. However, only four of the 10 recent condo-
the affordable units to be off-site.
minium projects that availed themselves of the 421-a
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Measuring Financial Return
6
Real estate developers use a variety of methods to evaluate the attractiveness of investing in
a particular project, depending in part on their
time horizon for owning the property and their
expectations for movements in rents or sale prices
by the time the building would be complete and
ready for occupancy. Individual developers may
rely heavily on a single method or favor a combination of methods to ascertain the projects economic viability.
Our analysis uses two common measures of
financial return to provide some insight into how
developers would respond to changes in the 421-a
program. The first is “stabilized net operating
income yield” (NOI yield), which is equal to the
net operating income (rental revenue less operating expenses) in the first full year of operation
divided by the total development costs (including
land and construction) for the project. By looking
only at what is essentially year four of the project
(when the building is expected to be in full operation), NOI yield consciously ignores any longer
term value from increasing rents or extended property tax relief. Based on consultations with industry experts, we assume in our modelling that, in
order to pursue a project, developers would seek
a minimum NOI yield at least 5.25 or 5.75 percent,
depending on the perceived riskiness of various
neighborhood markets.
Second, we calculate an internal rate of return
(IRR), a measure that takes into account both the
upfront costs for land and construction (like the
NOI yield) and the income stream earned over
time (i.e., the net operating income over a 12 year
period) and assumes a sale of the property at the
end of year 12 at a price adjusted for the remaining property tax exemption.13 We calculate the
IRR (unleveraged) on an unleveraged basis (i.e.,
without debt financing). While the lack of debt
simplifies the comparisons, the unleveraged IRR
analysis does not take into account all of the differences between Option A and Option C in the
equity contribution required from the developer
in a debt-financed deal. Programs such as the
Low Income Housing Tax Credit generate equity
through the federal income tax system and so can
serve to reduce the amount of capital required
of the developer in a leverage deal thus allowing a developer to put in less of their own cash
and potentially easing upfront cash demands on
the developer.
For both the NOI yield and unleveraged IRR we
need to plug in a land value for each market
type. We derive this land value by calculating
the amount of money that the developer could
pay under the current 421-a program and still generate the target NOI yield for each market type.14
As a result, these land values do not necessarily
reflect the actual prices that developers are currently paying, but they do allow us to determine
the direction of the impact of different changes
to the 421-a program on NOI yield and unleveraged IRR.
13 While we have received many estimates of construction
costs for mid- and high-rise buildings, we use the estimates
from our Inclusionary Zoning analysis. Madar, J. (2015).
Inclusionary Housing Policy in New York City: Assessing
New Opportunities, Constraints, and Trade-offs. Retrieved
from http://furmancenter.org/files/NYUFurmanCenter_InclusionaryZoningNYC_March2015.pdf.
14 See Appendix II for further discussion of target NOI yield level
for different markets.
In the areas outside of the GEA, where there is no
affordability requirement, virtually all privately
markets elsewhere in the GEA such as Downtown
developed multifamily buildings participated in
Brooklyn) where both rental and condominium
the 421-a program despite the requirement that
developments are using the 421-a program, the loss
subjects all the rental units to rent stabilization.
15
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IV.
Financial Analysis
7
In the rest of the Manhattan Core (and in strong
of the 421-a exemption would reduce the amount
that residential developers would be willing to
pay for the land and so land prices may fall unless
developers of commercial offices or other allowable uses are willing to pay the original prices.
To understand how the future of the 421-a pro-
Such a reduction in the value of land may make
gram may affect development in different parts
property owners less likely to sell, at least in the
of the city, we conducted a financial analysis that
short run, thus depressing residential develop-
examined both the potential expiration of the pro-
ment activity overall and curtailing the supply
gram and the adoption of the new 421-a program
of new housing. In the medium and long term,
framework across four different market types:
as landowners adjust their expectations of the
a very strong market within the GEA with mar-
value of development parcels downward or as
ket rents equal to $80 per square foot per year
market rents rise, the pace of development could
(e.g., Manhattan Core); a strong market within the
resume.16 The mix of development may also move
GEA with market rents of $60 per square foot (e.g.,
more toward condominiums because condomin-
Downtown Brooklyn); a moderate market within
ium developers seem to benefit less than rental
the GEA with market rents of $44 per square foot
developers from the tax exemption, and so would
(e.g., parts of Astoria); and a moderate-low mar-
be less hurt by its removal.17 For those developers
ket outside of the GEA with market rents of $37
who have already bought the land and planned to
square foot (e.g., Bedford-Stuyvesant).
use the 421-a program, expiration of the 421-a pro-
A. If the 421-a Program Expires
least the short run and could push more of them
If no agreement is reached on construction worker
in the direction of condominium development.
gram would lower the return they can earn in at
wages and the 421-a program expires, the impact
would vary significantly across our four market
types. In all cases, the NOI yield and unleveraged
IRR falls, and in two of the four markets it would
remain depressed even if land were free.
Inside portions of the Manhattan Core where condominium development already dominates, the
expiration of the 421-a program would further
reduce the relative attractiveness of developing new
rental housing. Rental development would become
even less competitive than it is now.
15 Of 143 majority market-rate buildings completed outside the GEA
between 2011 and 2014, 94 percent used 421-a and did not have to
provide any affordable housing.
16 Based on our models, the price of land would not have to fall
to zero in the Manhattan Core for developers to be able to earn a
return on their investment even if they had to pay full property taxes.
However the amount they pay for land would be lower than what
they would be willing to pay with the 421-a property tax exemption. Of course if there are competing uses for the land, e.g., retail
or office, then the land may be used for non-residential purposes,
further limiting the expansion of the residential housing stock. Our
NOI yield models estimate, for example, that a minimum rent of
$65 per rentable square foot per year is needed to provide a return
to developers based only on construction and operating costs for a
high-rise residential building in Core Manhattan under a fully taxed
environment. This roughly translates to $3,900 per month for a onebedroom unit of 720 square feet.
17 See footnote 12.
In other neighborhoods, rents appear to be too
more for land because, under this measure, the
low for mid- and high-rise construction to be via-
benefits from the extended tax exemption period
ble without the tax benefit or other public sub-
exceed the costs of the larger affordable housing
sidy. In Astoria and Bedford Stuyvesant where,
set aside. We also compare options A and C. We
according to our NOI yield model, the 421-a prop-
do not model Option B in the analyses because
erty tax exemption is required to make mid-rise
it is tailored for use in conjunction with discre-
development attractive, the expiration of the tax
tionary public subsidy. However, we recognize
break would likely stifle development until rents
that Option B might be attractive for developers
rise (an outcome made more likely by the slowing
who need more subsidy and are willing to trade
of new construction). Our NOI yield model sug-
deeper affordability requirements and/or a larger
gests that rents in excess of $56 per square foot are
affordable set-aside than required under either
needed to provide a sufficient yield with full prop-
Options A or Option C.
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erty taxes (even with no land cost). With rents in
8
Astoria only at $44 per rentable square foot, rental
Very Strong Markets
income would be insufficient to cover the costs of
In the Manhattan Core, as in all the markets we
mid-rise residential construction and operation
examined, the newly revised version of the 421-a
if the 421-a program were to expire, even if there
program could allow rental development to com-
were zero cost of land. With market rents at $37
pete more effectively against condominium devel-
per rental square foot, new mid-rise rental devel-
opment for developers who focus more on unlev-
opment would even be less likely to be attractive
eraged IRR than NOI yield. Development would
to developers in Bedford-Stuyvesant.
be slightly less attractive for those who would not
trade a higher unleveraged IRR for the lower NOI
In short, the expiration of the 421-a program could
yield. As can be seen in Table 3, the unleveraged
have a significant effect on residential develop-
IRR under Option A is higher than under the cur-
ment across the city, both by slowing the construc-
rent program (6.6% versus 5.7%) as a result of the
tion of new units at least in the short-run and pos-
extended benefit.18 This higher unleveraged IRR
sibly shifting some construction from rentals to
suggests that some rental developers might be
condos. But the exact nature of the effect would
able to bid more for land, or, in the case where the
vary depending on the market.
developer has already purchased the site, earn a
B. Potential Impact
of the New Framework
greater financial return in the long run.19
However, it is not clear whether this increased
Next we looked at the potential impact of the newly
revised framework for the 421-a program on rental
development across our market types assuming
no change in construction costs. While in many
cases the NOI yield would worsen because of the
increased affordability requirements, in all cases
the unleveraged IRR improves. Thus, for developers focused strictly on NOI yield, the amount they
would be willing to pay for land may fall; while
those basing investment decisions on unleveraged IRR could be more willing to pay somewhat
18 As noted in the above side bar, the models generating these
hypothetical financial returns assume a land value that is derived
based on the maximum a developer could pay and still receive the
target NOI yield for the given market type. See Appendix II for a
further discussion of why the land value we use for our models may
be different from today’s actual land prices in a given market. Also,
in this particular instance, we do not model Option C because it is
not avail­able in Manhattan south of 96th Street.
19 The modification of the 421-a rent-stabilization requirement is
not captured in our models. This change could, however, add to the
attractiveness of the new version of 421-a in high-rent areas. Under
the current version of 421-a, the market-rate units in participating
buildings are entered into rent stabilization for the length of the
exemption period. Under the new 421-a, market-rate units would
not be subject to rent stabilization if rents exceed the threshold for
deregulation (currently at $2,700).
Table 3: Rental Development under Existing 421-a Program vs. Newly Revised 421-a Program Option A
in Very Strong Markets
Manhattan Core ($80/sf) 195,000 Square Feet High-Rise
Scenario
Current
4% Low Income Housing Tax Credits
Percent of Units at Market
Affordability
Yes
75%
20% at 60% of AMI (47 units)*
10% at 40% of AMI (24 units)
10% at 60% of AMI (24 units)
5% at 130% of AMI (12 units)
Exemption phase out
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Yes
80%
Full Exemption
9
Option A
12 years
25 years
8-year phase out
25% tax exempt for years 26-35
NOI Yield
5.2%4.9%
IRR (unleveraged)
5.7%6.6%
*When units can be rented at a given AMI level, an owner can (and often does) market and rent those units for lower rent to lower-income
households. Because affordable units are marketed to households within a specified band of incomes, not only at a single income point, we
estimate for this table and tables 4, 5, and 6 that all units meeting a given AMI level result in an effective rent that is five percentage points
lower than the required income. For instance, units meeting the affordability requirement of 60 percent of AMI would average rents affordable to a three person household with income at 55 percent of AMI ($42,735 per year) resulting in an average rent of $1,068 per month.
For a three-person household with income at 125 percent of AMI ($97,125 per year), monthly rent would be $2,428.
Table 4: Rental Development under Existing 421-a Program vs. Newly Revised 421-a Program in Strong Markets
Downtown Brooklyn ($60/sf) 195,000 Square Feet High-Rise
Scenario
Current
Option A
Option C
Yes
Yes
No
80%
75%
70%
20% at 60% of AMI 10% at 40% of AMI
(47 units)
(24 units)
10% at 60% of AMI
(24 units)
5% at 130% of AMI
30% at 130% of AMI
(71 units)
4% Low Income Housing Tax Credits
Percent of Units at Market
Affordability
Full Exemption
21 years
25 years
25 years
Exemption phase out
4-year phase out
25% tax exempt for years 26-35
30% tax exempt
from 26-35
NOI Yield
5.2%5.0% 5.2%
IRR (unleveraged)
6.7%6.8% 7.3%
benefit in the very strong markets would be suffi-
First, condominium developers who currently use
cient to allow rental developers to outbid condo-
the 421-a exemption would no longer be eligible
minium developers who now appear to be setting
for the program because condominium values in
the price for land in some areas of the Manhat-
these areas would most likely exceed the maxi-
tan Core.
mum value allowed for participation.20 Second,
Strong Markets
20 With average initial assessed value per unit needing to be less
than $65,000 upon the first assessment following the completion date, condominium buildings with a Department of Finance
assigned average market value per unit of $145,000 and above
would not qualify for the exemption. The project cap of 35 units for
condominiums further reduces the attractiveness of the property tax
exemption for condominiums.
In a strong market such as Downtown Brooklyn
with rents of approximately $60/sf, the revised
421-a program would have two significant impacts.
Table 5: Rental Development under Existing 421-a Program vs. Newly Revised 421-a Program
in Moderate Markets
Astoria ($44/sf) 60,000 Square Feet Mid-Rise
Scenario
4% Low Income Housing Tax Credits
Option C
Yes
Yes
No
75%
70%
Affordability
20% at 60% of AMI 10% at 40% of AMI
(15 units) (7 units)
10% at 60% of AMI
(7 units)
5% at 130% of AMI
(4 units)
30% at 130% of AMI
(22 units)
Full Exemption
T H E L AT E S T L E G I S L AT I V E R E F O R M O F T H E 4 2 1-A TA X E X E M P T I O N : A L O O K AT P O S S I B L E O U TC O M E S
Option A
80%
Percent of Units at Market
10
Current
21 years
25 years
25 years
Exemption phase out
4-year phase out
25% tax exempt for years 26-35
30% tax exempt
from 26-35
NOI Yield
5.8%5.6% 5.9%
IRR (unleveraged)
7.9%8.1% 9.0%
as in all the markets we examined, the increase in
Moderate Markets
unleveraged IRR could make rental development
The newly revised 421-a program could also make
more attractive than it is currently.
rental development more attractive in moderate markets (e.g., Astoria) where the GEA today
Table 4 presents the returns for a hypothetical
already requires some affordable housing. As in
development in Downtown Brooklyn under the
all other markets where Option C is available, the
current 421-a program and the new 421-a pro-
higher rental income available under Option C
gram. While the NOI yield drops under Option A
makes it preferable to Option A based on NOI
compared to the current program, it is essentially
yield and our unleveraged IRR measure.22 As Table
unchanged under Option C. On the other hand,
5 shows, Option C results in a higher unlever-
both Option A and Option C show a higher unlever-
aged IRR (9.0% Option C vs. 8.1% Option A) and a
aged IRR than the current program. While Option
higher NOI yield (5.9% Option C vs. 5.6% Option A).
C generates more rental revenue than Option A as
As noted above, the use of debt-financing under
long as market rents do not exceed $120 per square
Option A may improve its relative attractiveness.
foot, Option A does allow developers to raise equity
through the sale of Low Income Housing Tax Cred-
Moderate-Low Markets
its. On an unleveraged basis Option C provides the
In moderate-low markets such as Bedford Stuyves-
higher unleveraged IRR (7.3%) vs. Option A (6.8%).21
ant, the new affordability requirement may not dis-
When combined with debt financing, however,
courage development as some have worried might
LIHTC equity can potentially improve the devel-
happen. Although the new versions of the 421-a
oper’s return on his or her own equity and thus
program would result in slightly lower rents than
the relative attractiveness of Option A.
21 When market rents are below $120 per square foot, the higher
average rents from the affordable units (125% of AMI vs. 61% of AMI)
more than compensate for the loss of higher income due to fewer
market rate units (75% vs. 70%).
22 Because of the higher AMI cap for the affordable units (130
percent of AMI vs. 60 percent of AMI), Option C also yields a slightly
higher NOI yield than the current program.
Table 6: Rental Development under Existing 421-a Program vs. Newly Revised 421-a Program
in Moderate-Low Markets
Bedford-Stuyvesant ($37/sf) 63,000 SF Floor Area Mid-Rise
Scenario
4% Low Income Housing Tax Credits
Option C
No
Yes
No
75%
70%
Affordability
N.A. 10% at 40% of AMI
(8 units)
10% at 60% of AMI
(8 units)
5% at 130% of AMI
(4 units)
30% at 130% of AMI
(23 units)
Full Exemption
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Option A
100%
Percent of Units at Market
11
Current
11 years
25 years
25 years
Exemption phase out
4-year phase out
25% tax exempt for years 26-35
30% tax exempt
from 26-35
NOI Yield
5.7%5.0% 5.5%
IRR (unleveraged) 6.0%6.8% 8.1%
market rents23 and NOI yield would fall slightly,
condominiums without use of the 421-a program
the unleveraged IRR would increase because, just
already predominates. To the extent the pending
like in the markets discussed above, the value of
program is intended to make rental more com-
the extended tax exemption would more than off-
petitive with condominium development, any
set the new affordability requirement. Even here,
increase in construction costs will temper the
Option A with its deeper affordability require-
impact, if not make future rental development
ments allow for a higher unleveraged IRR than
even less likely than under the current program.
the current program, but Option C again provides
the higher unleveraged return (see Table 6). As
Elsewhere, the impact of an increase in construc-
discussed earlier, the use of debt-financing under
tion costs will depend on the net change from
Option A may improve its relative attractiveness.
today’s program in the level of overall benefit. As
A Note on the Effects of
Higher Construction Costs
Because the new 421-a legislation has made contin-
long as developers do not perceive the increase in
construction costs as diminishing the net benefits
from the program designed for 2016 and beyond,
rental developers would continue to use the pro-
uation of the program contingent on an agreement
gram and should be able to outbid condomin-
on labor costs, we consider the possible impact of
ium developers who no longer have access to the
a rise in construction costs. As noted above, the
program.24 If the increase in construction costs
expiration of the 421-a program would be unlikely
results in a fall of net benefits from current levels,
to affect residential development in those portions
rental developers could refrain from undertaking
of the Manhattan Core where the development of
new projects until the price of land falls. In the
less strong rental markets, a rise in construction
23 With market rents of $37 per rentable square foot, a rental developer would only be forgoing minimal revenue by restricting rents
for households at 130 percent of AMI. At 130 percent of AMI, the
average rent per square foot of affordable units would be $34 given
our estimates of unit sizes (see Appendix II for further detail) and
projections of rental income due to marketing bands. This analysis
only looks at the financial impact and does not take into account
how the developer may react to the additional income restrictions
placed on the affordable units.
24 Because the condominiums produced under the newly revised
421-a program Option D would have an average AV of $65,000 per
unit or less, we do not expect they would be developed in strong
markets like Downtown Brooklyn. Elsewhere, the decision by
developers of condominium properties of 35 units or less to take
advantage of Option D could turn on the impact of any agreement
on labor costs.
T H E L AT E S T L E G I S L AT I V E R E F O R M O F T H E 4 2 1-A TA X E X E M P T I O N : A L O O K AT P O S S I B L E O U TC O M E S
12
costs could leave mid- and high-rise rental devel-
tend more toward condominiums, which seem to
opment uneconomic at current market rents
benefit less from the property tax exemption than
even if land were free. As land prices fall, it might
do rental properties. In weaker markets, develop-
also be the case that condominium development
ment of high-rise or mid-rise buildings without
could become viable even without any property
additional subsidy might not be feasible even if
tax exemption.
land were free.
An increase in construction costs could impact
Second, if the newly revised 421-a program with
development under the 421-a program’s Option
its higher affordability requirements and longer
B in a different manner. In those instances, the
exemption period goes into effect in 2016 with-
421-a tax exemption would only be a piece of the
out any increase in construction costs, the city is
overall subsidy package required to bring rents
likely to have more affordable rental units devel-
down to target levels. Any increase in the cost
oped in many parts of the city compared to what
of construction here could perhaps be offset by
the existing 421-a program would have created.
lowering other costs. If not, more subsidy will be
Condominium development without the 421-a
needed for the targeted number of units in the
program may still continue to dominate in cer-
Mayor’s Housing New York plan or fewer units
tain portions of Manhattan, though the program
will be able to be produced.
appears to make rentals more attractive.
Conclusion
Outside of the Manhattan Core, however, our unlev-
Our financial analysis of the possible outcomes
eraged IRR analysis suggest that the new program is
unlikely to cause a curtailment of residential devel-
from the 421-a legislation offers some insights into
opment. Under this measure of financial return,
its potential impact on new construction. First,
both Option A and Option C are better than today’s
if the 421-a benefit expires in 2016, residential
program, meaning that rental development with
developers would lower the amount they would
the 421-a program would be more attractive than
be willing to pay for land in many parts of the
it is now, even in the parts of the city where no
city. The result could be a pause in new residen-
affordable set-aside is currently required. Based
tial developments in areas outside of the Manhat-
on our analysis of unleveraged IRRs alone, Option
tan Core as both buyers and sellers of land adjust
C appears to offer higher returns than Option A in
to the new market. In the parts of the Manhattan
all our market types where the two are available,
Core where condominium development with-
but does not allow the developer to raise equity
out the 421-a exemption supports a higher land
through the federal tax system with Low Income
price than rental development, expiration of the
Housing Tax Credits. When combined with debt
421-a program would not affect the prices condo-
financing, LIHTC equity can potentially improve
minium developers are willing to pay but would
the developer’s return on his or her own equity
make rental development even less competitive.
and thus the relative attractiveness of Option A. If
developers go with Option C, the city would still
In strong markets such as Downtown Brooklyn,
get 50 percent more units than under the current
where fully taxed condominium development is
program but at rents that are at higher AMI levels
not driving land prices, development could resume
(30% of the units at up to 130% of AMI versus 20%
once landowners and developers adjust to lower
at up to 60% of AMI).
land values. However, this new development could
T H E L AT E S T L E G I S L AT I V E R E F O R M O F T H E 4 2 1-A TA X E X E M P T I O N : A L O O K AT P O S S I B L E O U TC O M E S
For rental buildings constructed under Options A
13
percent of units as affordable housing in order
and C, the impact of an increase in the cost of con-
to qualify for the 421-a property tax exemption
struction under the program will depend on the
(unless the developer can purchase one of the
overall effect on the bottom line taking account
remaining certificates produced under a now-
of both the lengthening of the period of property
defunct off-site program, discussed below). The
tax exemption and the increase in affordability
GEA currently encompasses all of Manhattan26
requirements. If the net effect of all these changes
and several neighborhoods in the other boroughs,
should be negative, developers that use the 421-a
including some of their most expensive areas (see
program may defer further development until land
Figure 1 in the main text). In Manhattan south of
prices fall or rents rise, with the concomitant inter-
110th Street, the exemption ends 20 years after con-
ruption in the flow of new projects. In moderate-
struction is complete (including an 8-year phase-
low markets like Bedford-Stuyvesant a decrease
out period). In the rest of the GEA, the exemption
in the net benefits from those offered by the pro-
lasts for 25 years after construction is complete
gram today could stifle the development of new,
(including a four-year phase-out period). The
mid-rise residential buildings even if land prices
exemption periods for buildings using certifi-
were zero. For development that relies more heav-
cates are 10 and 15 years, respectively.
ily on government subsidy (Option B), an increase
in labor costs would need to be offset by paring
If a project is developed with other types of gov-
down other costs or increasing other public sub-
ernment subsidy within the GEA, all the afford-
sidies, thus constraining the type and amount of
able units must be affordable to households earn-
affordable housing that can be produced with a
ing no more than 120 percent of AMI (in 2015, this
given amount of government resources.
equaled $93,240 for a three-person household),
and in buildings with 25 or more total units, the
average level of affordability for all the affordable
Appendix I
units cannot exceed 90 percent of AMI (in 2015,
The current version of the 421-a property tax
Projects outside of the GEA that have only market
exemption, still available to new residential devel-
rate units can also qualify for an exemption but
Details of the 421-a Program
this equaled $69,930 for a three-person household).
opment with three or more units until the end of
only one that lasts 15 years (including a four-year
2015, covers both rental and ownership proper-
phase-out period) without including any afford-
ties in New York City.25 If a project participates
able housing. If developed with substantial govern-
in the program, the value created by the devel-
ment assistance, the average rent cannot exceed
opment is exempt from the city’s property tax
a level affordable to a household earning 80 per-
during construction and for a set period ranging
cent of AMI and the maximum rent for any unit
from 10 to 25 years.
must not be greater than what would be affordable to a household earning 100 percent of AMI.
Under the current law, if a project is located within
an area called the “Geographic Exclusion Area”
(GEA), the developer must set aside at least 20
25 Some new housing development that is 100 percent affordable
can qualify for other types of property tax exemptions, not discussed
in this brief.
26 As a result of restrictions imposed by New York City Council, the
421-a property tax exemption is not generally available in the parts
of Manhattan that are zoned for very high-density commercial
development (with commercial floor area ratio equal to 15), which
are located in the Midtown and Downtown commercial districts.
However, legislation enacted by New York State in 2013 specifically
made five development sites in these parts of Manhattan eligible for
the 421-a exemption.
Affordable units that a developer provides to qual-
Analyzing Recent Development Activity
ify for a 421-a property tax exemption must be pro-
To better understand what different types of devel-
vided on the same zoning lot. For 35 years after
opment use the 421-a tax exemption program, we
construction, these units may only be initially
analyzed data provided by New York City Depart-
sold or rented to tenants who, at the time of initial
ment of Buildings to catalog every new building
sale or initial or subsequent lease, have incomes
that received a new building permit after July 1,
that match the requirements discussed above.
2008, when the current 421-a rules took effect,
27
T H E L AT E S T L E G I S L AT I V E R E F O R M O F T H E 4 2 1-A TA X E X E M P T I O N : A L O O K AT P O S S I B L E O U TC O M E S
and received an initial certificate of occupancy
14
Developers are also able to qualify for property
between 2011 and 2014. We then matched the
tax exemption under the 421-a program for sites
buildings to New York City Department of Finance
within the GEA by purchasing “negotiable certifi-
records to identify which are participating in the
cates” that were generated by written agreements
421-a program and, based on the length of the
entered into prior to December 28, 2007 under an
exemption, whether they qualified by using nego-
old off-site production option. Affordable hous-
tiable certificates or providing affordable units on-
ing developers were able to generate these certif-
site. We excluded buildings that received other
icates by building new affordable units anywhere
forms of property tax exemption or public sub-
in the city. Under current law, no new written
sidy, most of which are subsidized housing built
agreements for certificate units can be executed,
under the Low Income Housing Tax Credit pro-
but there are still a small number of unused cer-
gram, units built on state-owned land, or units
tificates available that can be used by market rate
exempt through a special act of the New York
projects to qualify for 10 or 15 years of tax exemp-
City Council.29
tion in the GEA. As a result, some number of new
Appendix II
market-rate projects would continue to qualify for
tax exemption without providing on-site affordable units until the remaining supply of certificates is exhausted.
For projects that are at least 20 percent affordable, there is no cap on the amount of property
value to which the exemption can apply. For most
other projects receiving the exemption (those
outside the GEA without affordable housing and
most of those using certificates 28), the amount of
property value that can be exempt is capped at an
amount set by law.
Modeling Assumptions
To build and run the model we needed to make a
number of assumptions, and these assumptions
are laid out in this Appendix. In forming these
assumptions, we solicited input from a number of
developers and investors who often had differing
opinions. In order to choose what values to use in
the model, we selected estimates that fell within
the bounds articulated by the market participants
and that would provide a reasonable idea of the
direction of the impact of the policy alternatives
tested. However, specific estimates of, for example,
the minimum level of rents required for construction to be economically attractive are dependent
on such variables as the choice of NOI yield and
27 For example, in 2015, 100 percent of the median income for a
three-person household in the New York City area (which, as defined
by federal guidelines, includes New York City and Putnam, Rockland, and Westchester counties) was $77,700.
28 Some certificates generated tax exemption that was not subject
to the cap provided those projects commenced on or before June
30, 2009.
the costs of construction and operations.
29 We also excluded a small number of projects that were ineligible
to participate in 421-a because they are in a zoning district with a
commercial floor area ratio of 15.
Construction Type
Hard Costs per gross square foot (excluding parking)
Hard Costs per
gross square foot
of parking area
Soft costs per gross
square foot
High-rise with no parking
$375
n/a
$75
High-rise with 20% parking ratio
$310
$200
$75
Mid-rise with 50% parking ratio
$250
$200
$75
Current Construction Costs
and Capital Reserves
Allocation of rentable square feet in building
Unit
size
Our models start with the above amounts as indic-
Studio
25%
520
ative of current hard and soft costs.
One bedroom
45%
720
Two bedroom
30%
1,050
30
T H E L AT E S T L E G I S L AT I V E R E F O R M O F T H E 4 2 1-A TA X E X E M P T I O N : A L O O K AT P O S S I B L E O U TC O M E S
Soft costs include design costs, engineering costs,
15
and construction period property taxes, among
To determine the gross square feet needed for park-
other costs; however, financing costs, including con-
ing, we assume 300 square feet per required space.
struction period interest, are modeled separately.
We assume all parking is below grade so does not
occupy any of the permitted zoning density.
We assume annual capital reserve contributions of
$300 per unit for years 3 to 12 and $600 per unit in
For models of full buildings, we assume a project
year 13 and later. Contribution amounts increase
site of 15,000 square feet and the following per-
annually by three percent.
mitted floor area ratios:
Building Size and Configuration
Project Type
Our modeling assumes that developers have an
High-rise with no parking,
very strong market, inside the GEA
13.0*
High-rise with 20% parking ratio,
very strong market, inside the GEA
13.0*
Mid-rise with 50% parking ratio,
moderate market, inside the GEA
4.0
Mid-rise with 50% parking ratio,
Moderate-low market, outside the GEA
4.2
effective six percent zoning density bonus by building under the “quality housing” formula available
in many zoning districts in New York City, so 1,000
square feet of nominal zoning density permits 1,060
square feet of above-ground floor area. To calculate the amount of rentable square feet per aboveground floor area, we assume an 18 percent “loss
factor” to account for common areas and abovegrade mechanical space. This loss factor does not
include square footage that is allocated to parking.
To calculate the number of units of each type per
1,000 square feet of above-ground floor area, we
allocate the rentable square footage, and then
divide by the unit sizes.
Permitted FAR
*Assumes development rights purchased
through a zoning lot merger
Operating and Management Costs
Beginning in year three, we assume operating and
management costs of $12.50 per rentable square
foot for high-rise construction and $9 per rentable
square foot for mid-rise construction (rates are as
of year 0 and escalate three percent each year).
We also assume management fees equal to three
30 We arrived at these costs through an informal survey in which
we received a wide range of figures. We chose numbers that seemed
to be in the ballpark but we make no claim that these construction
costs are indicative of the costs of any specific project.
percent of effective gross revenue for high-rise
projects and five percent of effective gross revenue for mid-rise projects.
Property taxes
For buildings with 421-a tax exemption, we cal-
assessed value by adding to the previous
culate the base tax liability using the fiscal year
year’s transitional assessed value the phase-
2014-2015 Class 2 property tax rate (12.855%) and
in from the most recent increase in actual
the following assessed values per square foot of
assessed value and the previous four phase-
land area.
ins (in year four, the transitional assessed
• $200 per square foot of land area for our high-
value is equal to the actual assessed value);
rise/very strong market project type (based on
• Calculate the property tax liability by mul-
the Manhattan Core)
T H E L AT E S T L E G I S L AT I V E R E F O R M O F T H E 4 2 1-A TA X E X E M P T I O N : A L O O K AT P O S S I B L E O U TC O M E S
tiplying the transitional assessed value by
• $35 per square foot of land area in our high-rise/
the Class 2 property tax rate of 12.855 percent
strong market project type (based on Down-
as of the 2014-2015 fiscal year. (We use the
town Brooklyn)
16
• Calculate the current year’s transitional
current Class 2 property tax rate as our pro-
• $35 per square foot of land area in our mid-
jection for the tax rate in all future years of
rise/moderate market project type (based on
operation. It is possible that the City Coun-
Astoria)
cil could reduce the rate in the upcoming
• $15 per square foot of land area in our mid-rise/
years as the city’s tax base increases; but, lon-
moderate-low market project type (based on
ger term, it is possible the rate will increase
Bedford Stuyvesant)
again when the city faces another economic
contraction.)
For buildings subject to full property tax, we calculate the tax liability as follows, based on the
Building Revenue
process used by the New York City Department
Market Rents: We assume that market-rate net
of Finance (DOF) as outlined in the current ver-
rentable square feet would generate gross rent
sion of the New York City Residential Property
equal to the amounts shown below, regardless
Taxes guide for Class 2 properties (available at
of unit type, reduced in year four by a five per-
https://www1.nyc.gov/html/dof/downloads/pdf/
cent economic vacancy rate.
brochures/class_2_guide.pdf):
• For year three, the tax liability is equal to the
base tax (see above), increased by 10 percent
We assume market rents will increase three percent per year.
per year from year zero. (We assume taxes for
years one and two are included in soft costs).
• Beginning in year four, the first year of full
operation, we:
• Divide the building’s net operating income
by a total cap rate of 13.115 percent (the rate
used by DOF for market-rate new construction) to calculate the market value;
• Multiply the market value by the 45 percent
assessment level for Class 2 properties to
determine the actual assessed value;
• Divide the increase in actual assessed value
since the prior year by five (i.e., to phase the
increased assessed value in over five years);
Project Type
Gross Rent per Rentable Square Foot
High-rise with no parking,
very strong market,
inside the GEA
$80 per rentable sf
High-rise with 20% parking ratio,
very strong market,
inside the GEA
$60 per rentable sf
Mid-rise with 50% parking ratio,
moderate market,
inside the GEA
$44 per rentable sf
Mid-rise with 50% parking ratio,
moderate-low market,
outside the GEA
$37 per rentable sf
Note: Amounts are as of year zero, but increase by three
percent per year.
Other income (e.g., from amenity charges, fees,
occurs during years one, two, and three (with con-
etc.): Beginning in year three, $1,000* per mar-
struction costs incurred 20 percent in year one,
ket-rate unit per year in the very strong market
60 percent in year two, and 20 percent in year
type; $750* per market-rate unit per year in the
three) and lease-up begins in year three, result-
strong and moderate market types; and $500 per
ing in full occupancy (subject to five percent eco-
market-rate unit per year in the moderate-weak
nomic vacancy) in year four.
market type.
For our analyses, we assume developers will need
Net parking revenue (beginning in year three):
to earn the target NOI shown in the following table
• For high rise construction in a strong market:
for each project type. These NOI yields are equal
$3,300* per space per year, with 10 percent
to the exit cap rate for each project (which we esti-
vacancy, less operating expenses of $900* per
mate based on interviews with industry partici-
space per year
pants) plus 125 basis points.
T H E L AT E S T L E G I S L AT I V E R E F O R M O F T H E 4 2 1-A TA X E X E M P T I O N : A L O O K AT P O S S I B L E O U TC O M E S
• For mid-rise construction in a moderate mar-
17
ket: $2,700* per space per year, with 10 percent
vacancy, less operating expenses of $900* per
space per year
• For mid-rise construction in a moderate-low
market: $2,400* per space per year, with 10 percent vacancy, less operating expenses of $900*
per space per year
Affordable Rents: equal to 30 percent of the 2015
AMI level assuming studios will be occupied by
Target Exit
NOI Cap
Project TypeYield
Rate
High-rise with no parking,
very strong market, inside the GEA
5.25% 4.00%
High-rise with 20% parking ratio,
very strong market, inside the GEA
5.25% 4.00%
Mid-rise with 50% parking ratio,
moderate market, inside the GEA
5.75% 4.50%
Mid-rise with 50% parking ratio,
moderate-low market,
outside the GEA
5.75% 4.50%
one-person households; half of the one-bedroom
units will be occupied by one-person households
We also calculate an unleveraged internal rate
and half by two-person households; and two-bed-
of return (IRR). As with NOI yield, the unlever-
room apartments will be occupied by three-per-
aged IRR takes into account the upfront costs for
son households. We assume AMI increases three
land and construction but it does not stop at year
percent each year (as it has, on average, over the
four. The unleveraged IRR takes into account the
past 20 years).
income stream earned over time (i.e., the net operating income over a 12 year period) and assumes a
*Amounts are as of year zero, but increase by three
percent per year.
Financial Performance
sale of the property at the end of year 12 at a price
adjusted for the remaining property tax exemption. We use the same exit cap rates shown above
to estimate the sale price of the property at the
Calculating NOI Yield and Unleveraged IRR:
end of year 12, based on the year 13 net operating
The NOI yield is equal to the net operating income
income under a full tax scenario and the year 12
generated in year four divided by the total amount
value of the remaining property tax exemption
spent on land (for full-building models), hard and
(calculated using a four percent discount rate).
soft construction costs, and capital reserves set-
We then subtract sale expenses equal to 3.5 per-
aside in years three and four. We assume land is
cent of sale proceeds.
purchased at the end of year zero, construction
The following table shows the unleveraged IRRs
we calculated under the current 421-a program.
These unleveraged IRRs correspond to the respective NOI yields we used to build this base case for
T H E L AT E S T L E G I S L AT I V E R E F O R M O F T H E 4 2 1-A TA X E X E M P T I O N : A L O O K AT P O S S I B L E O U TC O M E S
Market Type
Land Value
Example (per effective
neighborhood
zoning sf)
each project type:
Very Strong,
inside the GEA
Manhattan Core
$415
Base Case
Base Case 12 Year
NOIUnleveraged
Project Type
Yield
IRR
Strong,
inside the GEA
Downtown Brooklyn
$245
Moderate,
inside the GEA
Astoria
$55
Moderate-low,
outside the GEA Bedford-Stuyvesant
$25
High-rise with no parking,
very strong market,
inside the GEA
18
The resulting values are:
5.24%
5.73%
High-rise with 20% parking ratio,
very strong market,
inside the GEA
5.24%
6.67%
Mid-rise with 50% parking ratio,
moderate market,
inside the GEA
5.78%
Mid-rise with 50% parking ratio,
moderate-low market,
outside the GEA
5.73%
ified exemption and affordability requirements,
we keep land values constant so that the addi-
7.89%
tional benefits and costs are fully reflected in the
financial return (NOI yield and unleveraged IRR),
6.02%
Land Values
To calculate an unleveraged IRR and NOI yield
under various 421-a program environments, we
need to plug in a value for land. For this purpose,
we derive land values for each market type based
on the amount our model shows that a developer
could pay, given rent levels and construction and
operating costs, and still generate the target NOI
yield for the base case (current 421-a program).
As a result, these values do not necessarily reflect
prices being paid in the marketplace as developers
may factor in expectations of future rent movements or may rely on alternative approaches for
assessing their expected return. The land value
for each market is derived for the base case of
rental development which assumes the use of the
421-a tax exemption and, within the GEA, the use
of Low Income Housing Tax Credits.
When considering financial return based on mod-
rather than reflected in an adjusted land value.
Four Percent Low Income
Housing Tax Credits
We assume the use of four percent Low Income
Housing Tax Credits under the existing 421-a program and under the new program’s Option A. Four
percent LIHTC normally come as a result of using
tax-exempt bonds. To estimate the value, we multiplied the hard and soft costs by 0.95 (rough approximation of costs that would be eligible), 1.3 (basis
boost as New York City is a HUD-designated Difficult Development Area (DDAs)), 0.20 (percent
of project units affordable to households at 60
percent of AMI or lower), 0.03231 (credit amount),
$0.95 (value of credit in syndication), 10 (for the
years of credits provided), and 0.9999 (amount
raised). In our models, 20 percent of LIHTC equity
comes in at year one, 20 percent in year two and
the remaining 60 percent in year three.
31 LIHTC Facts & Figures. (n.d.). Retrieved from http://www.novoco.
com/low_income_housing/facts_figures/
The $0.95 value for the credit is based on feedback
Authors
that there is market risk associated with mixed-
Eric Stern
income buildings.
Mark Willis
Josiah Madar
While the 1.3 basis boost is available throughout
New York City today, not all projects may be eli-
Special Thanks
gible moving forward. Starting in 2016, HUD will
Jessica Yager
T H E L AT E S T L E G I S L AT I V E R E F O R M O F T H E 4 2 1-A TA X E X E M P T I O N : A L O O K AT P O S S I B L E O U TC O M E S
no longer designate entire metro areas as DDAs.32
19
Instead, it will designate Difficult to Develop Areas
Acknowledgments
by zip code, to be called Small Difficult to Develop
We gratefully acknowledge the generous support
Areas (SDDA). While the most recent maps HUD
of the Ford Foundation for the research that made
has issued for 2015 indicate that the most expen-
this policy brief possible. The statements made
sive areas of Manhattan and Brooklyn will still
and views expressed in this brief, however, are
qualify for SDDA status, some areas of the city
solely the responsibility of the authors. We are
may lose their designation as DDAs and thus not
also grateful to Elizabeth Propp for her real estate
be eligible for the 30 percent basis boost going for-
industry expertise and her generous help devel-
ward. The only other option currently for qualify-
oping the financial models on which our analy-
ing for the basis boost is for a project to be located
sis so heavily depends; Jonathan Miller of Miller
in a Qualified Census Tract, which, by definition,
Samuel for providing rent data; Reis, Inc. for pro-
is a very low income area.
viding development pipeline data; the advisory
Threshold Rents for Development
for Affordable Housing Policy for their insight and
boards of the Furman Center and Moelis Institute
To analyze the possible impact of changes in the
valuable feedback on early findings and drafts of
421-a program, we estimated the minimum rent
our report; and the other experts, stakeholders,
per square foot of apartment area needed for a
and city officials we consulted to hone our mod-
developer to earn a sufficient financial return
els, refine our understanding of existing programs,
on the “hard” and “soft” construction costs for
and discuss our findings.
high-rise and mid-rise rental buildings in New
York City. These threshold rents do not take into
account paying for land—the price of which is
largely a function of the extent to which market
rents exceed the minimum needed to provide sufficient return on construction costs.
32 Federal Register | Statutorily Mandated Designation of Difficult
Development Areas for 2014. (n.d.). Retrieved from https://www.federalregister.gov/articles/2013/11/18/2013-27505/statutorily-mandateddesignation-of-difficult-development-areas-for-2014
The NYU Furman Center advances research and debate on housing, neighborhoods, and urban policy.
Established in 1995, it is a joint center of the New York University School of Law and the Wagner Graduate School
of Public Service. More information about the Furman Center can be found at www.furmancenter.org.